Refocus on Client Goals, Not Interest Rate Bets

 In Market and Investment Insights

Even in the face of a historically low interest rate regime, core fixed income’s role in an asset allocation is as essential as ever: clients rely on their core bond allocations for potential capital preservation during a crisis. This is why it is important for advisors to leave rate forecasts to professional active managers and refocus on what they know for certain – their clients’ individual goals, timeline and key risks – and use that information to guide their asset allocations.

Our view on the Portfolio Construction Services team is that both intermediate- and short-duration fixed income strategies should play a strategic role in certain client portfolios, and these roles are calibrated based on client needs and goals.

In a perfect world, every client would only have one need or goal.

In reality, clients will usually have a mix of goals – for example, long-term retirement needs but also a shorter-term need for cash to purchase a second home or a car.

To apply a goals-based framework to a broader book of business, picture your spectrum of risk- based models with each model representing a bucket of clients with a similar mix of long- and short-term needs: a 70/30 stock/bond model with 30% core fixed income, for example, might consist of clients with, on average, 20% of their core fixed income needs being long term, with the remaining 10% short term.

Let’s look at a couple scenarios that illustrate common long-term and short-term client scenarios and their corresponding fixed income approaches: growing

Forecast Your Clients' Needs | Janus Henderson Blog

Implicit in this approach is an alignment of client needs and fixed income strategies, which results in an investment process that can be clearly articulated to clients and not derailed by an incorrect bet on the direction of the interest rate markets.

We believe clients are much better served with this kind of goals-based approach. Be careful not to let rate discussions and predictions sideline your focus on your end clients’ needs and key risks, which should be the main inputs to making a suitable asset allocation.

The Janus Henderson Portfolio Construction Services team offers a powerful framework to help organize the vast universe of fixed income managers and, more importantly, convey a clear, forward-looking approach to fixed income for clients. You can read more about our approach to goals-based fixed income portfolio design.

Learn more about resources to help optimize your portfolios and meet the investment needs of your clients with our Portfolio Construction Services program.

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Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

Any risk management process discussed includes an effort to monitor and manage risk which should not be confused with and does not imply low risk or the ability to control certain risk factors.
Actively managed portfolios may fail to produce the intended results. No investment strategy can ensure a profit or eliminate the risk of loss. Hypothetical examples are for illustrative purposes only and do not represent the returns of any particular investment.